Debt Costs Will Rise, But Defence Contracts Will Open Future Opportunities

Key Takeaways

• Increased financial expenses due to higher debt costs from recent acquisitions may affect future earnings growth.
  
• Reliance on high defense spending and long-term contracts could be vulnerable to political changes.
  
• Thales' strong commercial momentum, strategic acquisitions, and CSR advancements bolster revenue growth, profitability, and stakeholder relationships while positioning it for future expansion.

Catalysts

Provides various solutions in the defence and security, aerospace and space, digital identity and security, and transport markets worldwide.

• Thales faces increased financial expenses linked to the higher cost of debt following recent acquisitions, which could impact future earnings growth.
  
• There's a reliance on continued high defense spending, with much of the future growth tied to long-term government contracts and potential political changes, potentially affecting sales projections in the Defense segment.
  
• The Space business is currently undergoing restructuring and is expected to only break even in 2025, which could suppress margins and earnings from the Aerospace segment in the near term.
  
• Continued supply chain challenges, particularly for PCBs, could impact production schedules and constrain revenue growth if not resolved swiftly.
  
• Thales plans a significant ramp-up in production capacity to meet future demand, which might require substantial capital investment, impacting free cash flow and margins during the expansion phase.

Thales Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Thales's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 7.9% in 3 years time.
• Analysts expect earnings to reach €2.0 billion (and earnings per share of €9.73) by about March 2028, up from €1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.9x on those 2028 earnings, down from 47.8x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 28.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.16%, as per the Simply Wall St company report.

Thales Future Earnings Per Share Growth

Risks

• Thales has demonstrated strong commercial momentum, signing significant contracts that enhance its order intake and backlog, which can bolster future revenue growth. (Revenue)
  
• The company has exceeded its sales growth guidance and achieved record-high sales, indicating robust performance across its portfolio, particularly in Defence. (Revenue)
  
• Thales is actively investing in capacity expansion and talent recruitment to meet high demand, positioning itself to capitalize on future growth opportunities, which could enhance net margins and earnings. (Net Margins, Earnings)
  
• The strategic integration of acquisitions such as Imperva and Cobham AeroComms has been successful, contributing positively to operational performance and profitability. (Profit Margins, Earnings)
  
• Thales has made significant progress in CSR, achieving climate targets and improving gender diversity, which can enhance the company’s reputation and stakeholder relationships, potentially contributing to stable revenue and profit margins. (Revenue, Profit Margins)

Valuation

• The analysts have a consensus price target of €208.2 for Thales based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €308.0, and the most bearish reporting a price target of just €160.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €24.9 billion, earnings will come to €2.0 billion, and it would be trading on a PE ratio of 25.9x, assuming you use a discount rate of 6.2%.
• Given the current share price of €234.7, the analyst price target of €208.2 is 12.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.